The Comprehensive Income Representation under the Application of IAS/IFRSs. An Empirical Simulation in Italy

Lately, the International Accounting Standard Board (IASB) is involved both in a project on “Fair Value Measurements” and in a project on “Financial Performance Reporting”. While the former aims at providing an application guidance to define and measure fair value as a valuation criterion, the latter aims at including the Comprehensive Income representation in the Financial Statements to enhance the efficacy of the information in assessing firm performance. Drawn on this projects, this paper is intended to investigate the relationship between fair value measurement and income numbers, according to the features of both Italian enterprises and Italian stock market. The first step is to pinpoint all the IAS/IFRSs in which a fair value reference for valuation is established in order to find out the differences in fair value measurement bases (replacement cost, net realizable value, value in use, etc), according to the dictates of each standard. Another issue is to investigate on the valuation techniques when the reference to a price quoted in an active market lacks (such as current market value of a similar asset, discounted cash flow model, option pricing model). Furthermore, changes in fair value could affect both income or equity, as arranged in each standard. All this considerations will have an impact on the income statement, if a Comprehensive Income representation should be introduced, since it will move from the representation of the realised income towards the representation of different kinds of comprehensive income figures, depending on the related notion of capital maintenance. In fact, the bases adopted for income measurement will imply the size of capital to be maintained. The research will be conducted analyzing the financial statement of a bank in Naples. Referring to this report, prepared for the first time according to the IAS/IFRS a simulation analysis will be proposed, trying to understand, according to the IASB project, what could be the Comprehensive Income Statement. In substance, a reclassification of “Profit and Loss” account will be proposed in order to point out the differences in communication between the present statement and the proposed one. This kind of analysis could be of support for the standard setter to ascertain the empirical Comprehensive Income Representation under IAS/IFRSs